An $11bn (€8.1bn) swing in revenues from trading and principal investments plunged Goldman Sachs to a larger than expected $2.1bn loss in the fourth quarter—the bank’s first quarterly loss since 1994.

The results round off a horrendous year for the banking industry that has even taken its toll on Goldman Sachs, the bank long considered the most impervious to frail market conditions.

Lloyd Blankfein, chairman and chief executive, said today the results reflected "extraordinarily difficult operating conditions, including a sharp decline in values across virtually every asset class. While our quarterly performance obviously didn't meet our expectations, Goldman Sachs remained profitable during one of the most challenging years in our industry's history."

Goldman Sachs lost $4.4bn in trading and principal investments in the fourth quarter, compared with the same period last year when it earned $6.9bn in revenues from the business.

The chief driver was fixed-income, currencies and commodities trading, which swung from a $3.3bn profit last year to a $3.4bn loss in the final three months of this fiscal year, as losses on investments including corporate debt, private and public equities and credit products took their toll.

Principal investments also racked up a $3.6bn net loss in the fourth quarter and $3.9bn for the year, largely driven by losses from corporate and real estate principal investments.

David Viniar, chief financial officer, of Goldman Sachs, said on a conference call that the bank marked investments at fair value and so valuations had declined in line with the falls in equity and credit markets this year.

“We have no intention of selling these positions as they are excellent long-term investments and we accept that they may go down further in value,” Viniar said.

Viniar said that a reasonable part of the drop in revenues at FICC was due to long-term investments being marked to current market values, even though the bank did not intend to sell these positions.

He said the types of investments that the bank made include distressed debt, private equity and other types of debt in the capital structure. Viniar gave the example of two investments that totalled $68m where the bank had made a return of more than $300m in life-to-date profit but had lost more than $200m in the fourth quarter due to the current worldwide declines in credit indices.

The losses overshadowed a slight rise in equity trading revenues to $2.6bn.

Goldman Sachs posted a $2.1bn group net loss in the fourth quarter, its first three-month loss since the fourth quarter of 1994, compared with a $3.2bn profit a year ago. The $4.97 per share loss beat analysts’ $3.7 per share loss predictions.

The bank had started the year on market-leading form. It reaped $1.5bn in profits in the first quarter, half the figure earned a year before, and $2.1bn in the second quarter, which was only slightly below the previous year—in both cases smashing analysts’ estimates.

By the third quarter, however, questions were being asked in some quarters about the viability of the independent broker-dealer model following the collapse of Lehman Brothers. Even then, Goldman beat analysts’ quarterly predictions by turning in a smaller than expected 71% fall in net profits.

Goldman Sachs said in its results statement today that full-year net profits fell four-fifths to $2.3bn.

Less than a week after its third-quarter results in September, and nearly a decade after becoming a public company in May 1999, Goldman Sachs revealed drastic plans amid the escalating liquidity drought to convert into a bank holding company to boost the diversity and security of its funding sources.

The bank also struck a deal to sell $5bn of preferred stock to Warren Buffett’s Berkshire Hathaway group and raised a further $5bn of common equity in a capital raising exercise.

Goldman Sachs more recently has also followed rival banks in succumbing to the downturn in investment banking and capital markets business by cutting jobs. The bank in October drew up plans to cut 10% of its global workforce, with up to 250 European staff expected to be laid off last week.

Viniar said Goldman had taken a number of steps to reduce risk and its balance sheet. Total assets have reduced by 18% since the end of August to $885bn. Outstanding leveraged loans have reduced to $7bn from a peak of $52bn and commercial real estate balances have fallen by 29% to $10.9bn.

Goldman’s tier one capital ratio was 15.6% at the end of November and global core excess liquidity was $96.7bn.

Viniar said: "We have significantly reduced legacy assets and have no exposure to consumers so our balance sheet is strong and we have significant capital to take advantage of opportunities that arise in 2009. If we see good investment opportunities we will take advantage in the full knowledge that fair value accounting results in markdowns and us taking losses."

Viniar said his expectation was that the balance sheet would continue to grow, and not shrink and that there would be no change in Goldman’s business model

When Blankfein spoke at a Merrill Lynch conference last month he said Goldman’s conversion to a bank holding company would not have any major impacts on its investment banking activities.

Viniar said: “One thing you will not find is the CFO disagreeing with his CEO. Our model is to be an advisor, financier, co-investor and intermediary for our clients and we have a very good business model that is as valuable, if not more, as markets recover going forward.”

Moody's Investors Service said Goldman's fourth quarter loss was within the ratings agency's expectations and is not indicative of a risk control failure at the firm.

Moody's said: "Goldman Sachs remains profitable for 2008 and the firm has outperformed many of its peers during the ongoing credit crisis. Additionally, the firm has reduced leverage and raised substantial capital.

This supports its current rating level, though the negative outlook considers the likelihood of an extended downturn in capital market activity, which will reduce Goldman Sachs' revenue and profit potential in 2009 and beyond."